Download Introduction to the External Business Environment - Business

Introduction to the External Business Environment
Introduction
A business does not function in a vacuum. It has to act and react to what happens
outside the factory and office walls. These factors that happen outside the business
are known as external factors or influences. These will affect the main internal
functions of the business and possibly the objectives of the business and its
strategies.
Main Factors
The main factor that affects most business is the degree of competition – how
fiercely other businesses compete with the products that another business makes.
The other factors that can affect the business are:
Social – how consumers, households and communities behave and their beliefs. For
instance, changes in attitude towards health, or a greater number of pensioners in a
population.
Legal – the way in which legislation in society affects the business. E.g. changes in
employment laws on working hours.
Economic – how the economy affects a business in terms of taxation, government
spending, general demand, interest rates, exchange rates and European and global
economic factors.
Political – how changes in government policy might affect the business e.g. a
decision to subsidise building new houses in an area could be good for a local brick
works.
Technological – how the rapid pace of change in production processes and
product innovation affect a business.
Ethical – what is regarded as morally right or wrong for a business to do. For
instance should it trade with countries which have a poor record on human rights.
Changing External Environment
Markets are changing all the time. It does depend on the type of product the
business produces, however a business needs to react or lose customers.
Some of the main reasons why markets change rapidly:
 Customers develop new needs and wants.
 New competitors enter a market. 0
 New technologies mean that new products can be made.
 A world or countrywide event happens e.g. Gulf War or foot and mouth
disease.
 Government introduces new legislation e.g. increases minimum wage.
Business and Competition
Though a business does not want competition from other businesses, inevitably
most will face a degree of competition.
The amount and type of competition depends on the market the business operates
in:
Many small rival businesses – e.g. a shopping mall or city centre arcade – close
rivalry.
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A few large rival firms – e.g. washing powder or Coke and Pepsi.
A rapidly changing market – e.g. where the technology is being developed very
quickly – the mobile phone market.
A business could react to an increase in competition (e.g. a launch of rival product)
in the following ways:
Cut prices (but can reduce profits)
Improve quality (but increases costs)
Spend more on promotion (e.g. do more advertising, increase brand loyalty; but
costs money)
Cut costs, e.g. use cheaper materials, make some workers redundant
Social Environment and Responsibility
Social change is when the people in the community adjust their attitudes to the way
they live. Businesses will need to adjust their products to meet these changes, e.g.
taking sugar out of children’s drinks, because parents feel their children are having
too much sugar in their diets.
The business also needs to be aware of their social responsibilities. These are the
way they act towards the different parts of society that they come into contact with.
Legislation covers a number of the areas of responsibility that a business has with its
customers, employees and other businesses.
It is also important to consider the effects a business can have on the local
community. These are known as the social benefits and social costs.
is where a business action leads to benefits above and beyond the
direct benefits to the business and/or customer. For example, the building of an
attractive new factory provides employment opportunities to the local community.
A social cost is where the action has the reverse effect – there are costs imposed on
the rest of society, for instance pollution.
A social benefit
You may well be asked to identify specific social costs (Or benefits.)
associated with a specific business. You will have to think!
These extra benefits and costs are distinguished from the private benefits and costs
directly attributable to the business. These extra cost and benefits are known as
externalities – external costs and benefits.
Governments encourage social benefits through the use of subsidies and grants
(e.g. regional assistance for undeveloped areas). They also discourage social costs
with fines, taxes and legislation.
Pressure groups will also discourage social costs. How?
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Topic: Government economic policy
The government’s main economic aims are:
 Economic growth – more goods and services produced in the economy.
 Low inflation – prices that are not rising too fast.
 Low unemployment – as many people in jobs as possible.
 Fair distribution of income. Define ‘fair’!
The main policies used by government to achieve these aims are:
Fiscal policy – government spending and taxation. Government spending is also
known as public expenditure.
Monetary policy – interest rates (the cost of borrowing money and rewards for
saving).
Legislation – laws that affect the way that a person or business can act.
The UK Government spends over £400bn a year and takes about the same in taxes.
It also passes legislation. These affect the way business can act, e.g. what it can
produce, how much it costs and who it can employ. It also affects the way that
consumers spend their money.
Taxation
Taxation comes in two forms:
Direct taxation – taxation on income and profits (income tax, National Insurance
and corporation tax).
Indirect taxation – taxation on spending (VAT, excise duty).
Some examples of UK taxation are shown in the table below:
Example
Type of tax/how it works Effects on business if the
tax rises
Income tax A percentage of an individual’s A reduction in disposable
income is taken in tax.
income (money available to spend
after tax); therefore households will
not be able to spend as much,
reducing sales. Will any
firms benefit?
VAT
A percentage (17.5% currently Increases the cost of the
in the UK) is added to the price product, leading to fewer sales.
of the item. It does not apply
to all goods, e.g. children’s
clothes.
Tax on beer An amount is added to the cost Increases the cost of the
(excise
of beer.
product, leading to fewer sales.
duty)
Often for health reasons.
Corporation A tax on profits made by Reduces the amount of profit
tax
businesses.
available at the end of the year to
be either distributed to the
shareholders or to pay for
more investment.
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National
insurance
A tax on incomes (like income The same as income tax
tax).
and corporation tax but added to
BUT also a tax on businesses together.
who have to pay a portion of
the tax on behalf of the worker
Government Spending
The UK government spends approximately £400bn a year. Over a third of this
money goes in welfare benefits such as pensions, unemployment benefit and other
forms of income support. The rest is spent on health, education, defence, roads, law
and order and on supporting businesses and local communities.
Businesses can benefit directly or indirectly from the rest of the spending.
Governments provide money in the form of grants, subsides and tax breaks (paying
less tax than you should) to encourage businesses in certain areas of the economy.
A business that is starting out, or is going to provide employment in a depressed
area may be able to benefit from such help.
Examples of government assistance are:
Regional selective assistance that gives help to businesses wanting to set up in
areas of high unemployment.
Enterprise zones aim to attract businesses to inner city areas.
Governments also provide support through advisory bodies coordinated by the
Department of Trade and Industry, especially for small businesses.
Other bodies also provide information and support such as the Chambers of
Commerce. This organisation represents businesses in a local community, acting as
a source of advice from the experiences of other businesses and exploiting the
connections within these businesses.
Businesses can also benefit indirectly because of the huge spending that
governments undertake. For instance the increases in health spending will benefit
businesses that produce medical products or services to hospital (e.g. cleaning).
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Topic: Economy - Exchange Rates
An exchange rate is the value of one currency expressed in terms of another. So £1
may be worth $1.55 and €1.33.
A currency that is getting stronger, or appreciating, is a currency that is going up
in value against another. So £1:$1.5 moving to £1:$1.8 means the pound is getting
stronger
A currency that is becoming weaker or depreciating is a currency that is going
down in value against another. So £1:$1.8 moving to £1:$1.5 means the pound is
getting weaker
Currencies change in value against each other all the time. This is because most
currencies are based on flexible exchange rates. The notable difference is in the
Euro zone (see below).
Currencies change in value because there is a change in demand for holding that
currency. Households, governments and businesses need other countries currencies
to buy their goods and services (e.g. holiday makers for purchasing wine or a
business buying spare parts for machinery from France will need Euros).
A change in exchange rates might affect a business in the following ways:
Exchange rates changes can increase or lower the price of a product sold abroad
The price of imported raw materials may change
The price of competitors’ products may change in the home market
For example an increase in the exchange rate will mean that price abroad goes up,
lowering sales; price of imported raw materials falls, either leading to a fall in price
and more sales, or an increase in profits; competitors’ prices fall, meaning lower
sales.
Exchange rate French
(€15,000)
Originally
£1:€1.5
£10,000 in the UK
£
appreciates
£8,333
£1:€1.8
£
depreciates
£12,500
£1:€1.2
carUK car (£12,000)
€18,000 in France
French
raw
materials (€4 per
kilo)
£2.67
to
businesses
€21,600
£2.22
€14,400
£3.33
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UK
Topic: Economy - interest rates
Interest rates are the “cost of money”. If you borrow money then you may have
to pay back the original amount PLUS a charge for borrowing the money. That
charge is known as interest. It is a percentage of the original amount. You may have
to pay the interest weekly, monthly or annually. It is also the reward for saving –
you receive a percentage of the original amount.
There is never just one interest rate. There are many rates based on whether you
are a borrower or saver, the type of borrowing you are making and your personal or
business circumstances. However the rates will tend to move up and down with the
BASE RATE, which is a central rate, set by the Monetary Policy Committee of the
Bank of England.
The following types of borrowing and saving often have an interest rate attached:
 Bank loans
 Mortgages (borrowing to purchase a property)
 Debentures
 Deposit accounts
 Bank current accounts
 Credit cards
A change in interest rates affects businesses in the following ways:
If the business has loans then an increase in interest rates will mean higher
repayments, reducing profits.
If the business wants to borrow money to say build new premises, then they are
less likely to go ahead with the project when interest rates increase.
Customers are going to find that they are more attracted to saving than to spending
if interest rates go up and less likely to borrow money to spend as well. This may
reduce sales for the business.
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Topic: Economy - labour and unemployment
The labour market is where businesses hire workers. A business needs people to
help the day to day running of the operation. The amount of labour needed depends
on whether the business is a labour intensive or capital intensive.
A business that needs more people and less machinery is known a labourintensive business. Hairdressing, house building, teaching and the fashion industry
are examples of labour intensive industries.
A capital-intensive industry is where a business relies heavily on machinery and
technology in its transformation of inputs into outputs. Good examples include the
car industry, steel production and the rail industry.
Unemployment is where there are people you are willing and able to work but
cannot find employment at the going wage rate. For example a machine worker who
cannot get a job because there are no jobs for machine workers in the area. High
unemployment, though it can be bad for local sales, can provide a business with a
good source of cheap labour.
On the other hand a shortage of labour might cause difficulties for a business:
It may be more difficult to recruit new people - which might prevent the business
from growing as fast as it wishes
Existing workers may demand higher wages because they know that the business
will be reluctant to release them.
Competitors may try harder to poach the best staff.
The business may have to invest further in staff training and development rather
than rely on “recruiting” new skills into the business.
Recruitment of personnel can also depend on the mobility of labour in the labour
market.
Mobility of labour means the speed with which a person can move into a different
job. There are two main types:
Geographical mobility
Can they physically move to that place of work? This depends on the transport links
as well as people’s desire to move house to get a job.
Occupational mobility
Do they have the skills to do the new job? This depends on the education and
training that people have. Even with GCSEs and A levels students will need more
training to do many jobs.
The state of the regional labour market will be a major influence on location
decisions for businesses. In the South East, especially near London, there is low
unemployment, so it will be difficult to find cheap labour, though there is good pool
of skilled labour. This is because a business may be able to attract good workers
from other businesses, at higher wages though. In the North East there are pockets
of high unemployment, with skilled workers without jobs, because some of the more
traditional industries have declined.
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Legislation
The way in which a business can operate is controlled by legislation. Laws can be
imposed by the UK or European Union courts and government. Legislation mainly
acts as a constraint on business.
The main areas of legislation that affect businesses are:
 Employment law
 Consumer protection
 Competition law
Employment law
This is aimed at protecting the health, safety and rights of employees
The main employment laws that a business needs to consider are:
Health and Safety at Work Act 1974
Employers must provide safe premises and machinery. They must ensure that
workers health is not affected by their work.
The key costs and benefits of the Health and Safety at Work Act for a business are:
- Adds to costs to businesses that need to train staff and spend money maintaining
the standards set out.
- BUT may reduce cost in the long term because of a reduction in staff absences
and not having to pay compensation for injuries.
- Good health and safety record is a good way of encouraging recruitment of good
workers.
Equal Pay Act 1970
Employees who do equal work or work of equal value must receive the same pay as
workers of the other sex.
Sex Discrimination Act 1975
Employees cannot be sexually discriminated in employment, training or recruitment.
Race Relations Act 1976
It is illegal to discriminate against someone on the basis of race, ethnic group or
colour.
Employment Protection Act 1978
Employees must be given a written contract of employment. It protects against
unfair dismissal (without good cause) and says that redundancy pay must be paid if
the worker has served more than two years and their job is to be abolished.
Employment law imposes additional costs to the business because they have to
spend additional money on training, recruitment and pay. Like the Health and Safety
Act there are also benefits if the workers feel they are treated fairly and there is
more security, they will be more motivated.
Consumer Protection
This is aimed at making sure that businesses act fairly towards their consumers –
especially since consumers are sometimes in a much weaker financial position. The
main consumer protection legislation is:
Sale and Supply of Goods Act (this states that goods must be of satisfactory
quality)
Trade Description Act (goods and services must perform in the way advertised by
the business)
Consumer Credit Act (this protects the consumer when borrowing money or
buying on credit)
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Consumer protection imposes additional costs to businesses since they have to
comply with the laws. If they do not comply they risk fines and ultimately being put
out of business by the courts of law.
Competition law
Competition law aims to ensure that fair competition takes place in each industry.
Governments believe that greater competition leads to lower prices, better quality
goods and a wider variety of products.
Competition Commission (CC) and the Office of Fair Trading (OFT)
investigate any business that has more than 25% of the market share, especially if it
merges with another business. They may feel that the business has too much power
and can set high prices and provide poor quality products. The CC and OFT has the
power between them either to fine these businesses, or prevent the merger taking
place.
The OFT can also fine businesses who fix prices or prevent other businesses from
trading in their market. Most recently they investigated the car industry and
warranties offered by leading electrical retailers.
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Topic: Business and technology
Technological change refers to the changes in production techniques and production
equipment. It could be a change in the machinery used to make a product or the
computers to design a product.
More recently, it is the use of the computers and information technology (IT) to
improve the efficiency and competitiveness of businesses that has led to
technological change. Since technological is so rapid, there are important
implications for businesses.
A business can be affected by the following technological change:
 In production
 In provision of services
 In the office
Technological change in production
Technological change leads to improved production of goods and services due to:
Computer-aided manufacturing (CAM) this reduces labour costs, is more
accurate and faster and can work at any hour of the day. The computer controls the
machinery.
Computer-integrated manufacturing (CIM) here, computers control the whole
production line. Best example is in car production where robots undertake much of
the work, reducing the need for labour to perform boring, routine tasks. It also
means more complex tasks can be done, e.g. mass-customisation.
Computer-aided design (CAD) Computers are used to help design products
using computer generated models and 3D drawings. Reduces the need to build
physical models to test certain conditions, known as prototypes. This can be
expensive to produce just for testing purposes (e.g. aircraft or new cars.
Therefore new production technology can increase the speed of production, improve
the quality of the product and reduce costs per unit of production.
Technological change can be seen in the shops and the provision of other services
such as banking or repairs.
Electronic point of sale (EPOS) and Electronic Funds Transfer at Point of Sale
(EFTPOS) speed up transactions in shops and give vital information for businesses
so they can sort out their stock levels. EFTPOS means that shoppers can pay for
goods and services using credit and debit cards.
Banks can use “hole in the wall” machines to deliver cash or take deposits –
therefore remain open all hours.
Repair people can use handheld computers to work out what is wrong with the
machinery they are examining.
Technological change in the office helps speed up the movement of information and
improves the analysis of information:
Communication is improved through the use of the intranet and Internet. The
intranet is an internal system of computer communication while the internet can be
used to communicate with customers, suppliers amongst others in the outside world
(through websites and email).
Workers can work away from the office using mobile technology such as phones,
laptops and modems.
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Computers can be used to process, analyse and store vast amounts of data to give
the business more quality information.
E-commerce is the ability of businesses to trade with the world via websites. This
means that there is a larger market and the business is now open 24 hours a day.
This has provided opportunities for businesses that could only trade locally to now
expand the size of the market (e.g. Amazon as world wide book and CD sellers).
Customers can also shop around for the best deals for new products. So, often
prices have fallen. Is this a good thing?
The Internet can also be useful for recruitment purposes. Job vacancies can be
advertised and targeted to the right audience, often costing less than print
alternatives. E.g. e-teach sends free emails every week detailing teachers posts to
subscribers.
However Technological change can be very expensive: technology involves the
following additional costs:
 Purchasing the equipment
 Installation
 Training staff
 Maintenance
 Replacement/upgrading
 There is legislation associated with the use of technology – e.g. computer
screens, noise levels.
In summary technological change can bring the following benefits to a business:
 Reduced running costs
 Improved productivity
 Improved competitiveness
 Lower costs per unit of product
 Improved quality of service (e.g. speed of service)
 Reduced wastage
If the benefits of the above outweigh the costs, then a business should be investing
in new technology.
However it may need to consider the social costs of new technology:
 Job losses
 Motivation of workers – worried about machines taking over their jobs
(though extra training to work with machines may provide some increased
motivation)
 Loss of traditional skills
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